Everything you need to know about Revised Pay As You Earn (REPAYE)
Physicians are eligible for REPAYE when they fall within certain guidelines.
If you’re considering going the Public Service Loan Forgiveness (PSLF) route to pay off your student loans, you’ve probably already realized it’s a little more complicated than it first looks. Having your loans forgiven isn’t as easy as just filling out a couple forms and choosing the right career path – you have to pick a specific repayment plan, which can save or cost you thousands depending on which you choose.
That choice is entirely personal, and depends on factors like your marital status, how much your spouse earns, your income and how much you owe overall. One of the newest options is REPAYE, an updated version of the Pay As You Earn (PAYE) plan. Here’s everything you need to know about choosing that path.
What is Revised Pay As You Earn (REPAYE)
REPAYE is a relatively new plan, first announced in 2015. It’s similar to the Pay-As-You-Earn (PAYE) plan, but REPAYE is available to about five million more borrowers than its older counterpart.
Payments under REPAYE are 10% of your adjusted gross income (AGI) minus 150% of the federal poverty guidelines, based on your family size and state of residence. If you earn less than 150% of the federal poverty guidelines, approximately $18,210 for one person, you’ll pay $0 each month.
A major perk of REPAYE is the interest subsidy provided by the government. When you use REPAYE, you often accrue interest faster than you pay it off. This interest collects and capitalizes on your loan.
But if you have subsidized loans, the government will help cover the extra interest – 100% for the first three years and 50% after. If you have unsubsidized loans, they’ll pay 50% of the interest. REPAYE is the only income-driven repayment plan that offers this interest subsidy.
REPAYE structures payments based on a 20-year term for undergraduate loans and 25 years for graduate or professional school loans. If you still have debt after your term has expired, the remaining balance will be forgiven.
You’ll owe taxes on the amount forgiven, which can equal thousands of dollars – or more – depending on the remainder. A graduate with $50,000 forgiven under REPAYE could have to pay an extra $12,500 to $15,000 on their taxes.
Who is eligible for Revised Pay As You Earn (REPAYE)?
Unlike PAYE, which has some restrictions on who is eligible, REPAYE is open to any borrower with Direct student loans. Direct student loans include Direct Subsidized and Unsubsidized Loans, student Direct PLUS loans and Direct Consolidation loans. Parent PLUS loans are not eligible for REPAYE.
PAYE requires you to be a first-time borrower, with the loan term starting on or after October 1, 2007 and the first loan disbursement on or after October 1, 2011. REPAYE has no such requirements.
Graduates with Federal Family Education Loans (FFEL) or Perkins loans need to consolidate into a Direct Consolidation loan in order to be eligible for REPAYE. Only consolidation through the federal government is accepted. If you consolidate with a private company, such as SoFi or LendKey, your loans will become private and no longer eligible for REPAYE.
With REPAYE, you don’t have to prove a financial hardship in order to qualify.
How Revised Pay As You Earn (REPAYE) works with PSLF
Public Service Loan Forgiveness (PSLF) is a government program that encourages graduates to work for public institutions or non-profits by forgiving their loans after 10 years of payments.
Because PSLF allows borrowers to choose an income based plan, many use that opportunity to lower their monthly payments while working for loan forgiveness. PSLF doesn’t report the amount forgiven as income, so borrowers don’t have to pay any extra taxes on that amount.
Doctors working in a public hospital or not-for-profit can use REPAYE while striving for PSLF – in fact, it might be their best option.
A pediatrician earning $120,000 a year with $450,000 in student loans at 4.25% interest will pay $849 a month. After 25 years, they’ll have paid $130,791 total and have $481,355 forgiven.
How interest works in Revised Pay As You Earn (REPAYE)
Interest on student loans accrues while you’re in repayment. If you choose an income based plan like REPAYE, it might accrue faster than you can repay it.
In that case, the federal government can cover the remaining interest. For the first three years, they’ll pay 100% of extra interest for subsidized loans and 50% for unsubsidized loans. After three years, 50% of any leftover interest will be covered.
The remaining interest will be capitalized or added onto your original balance. If you finish your REPAYE term without going through PSLF, you’ll owe taxes on that capitalized interest.
To find out if you have a subsidized or unsubsidized loan, log on to your loan servicer’s website. You should see subsidized or unsubsidized next to the name of the loan. If not, call your issuer and ask.
Any income based repayment plan will cost you more in interest than the regular 10-year term, so take that into consideration when you’re deciding. It might be better to choose REPAYE at the beginning of your career while you’re just getting started and switch back to the standard plan once you can afford those payments.
Is Revised Pay As You Earn (REPAYE) Right for You?
A good rule of thumb for deciding if REPAYE is right for you is to compare your income to your debt. If you owe double or more than you currently earn, you’ll benefit from REPAYE – especially if you’re struggling to make your student loan payments every month.
One of REPAYE’s few downsides is that it counts spousal income toward your AGI, whereas other plans don’t. This will likely increase your monthly payments, unless your spouse earns significantly less than you do.
A couple with one spouse earning $50,000 and another earning $30,000 with $45,000 in student loans will pay $464 a month, compared to $47 on the PAYE or IBR plan which excludes spousal income when couples file their taxes separately.
A single person with $75,000 in student loans and $25,000 in income will pay $58 a month, the same as they would under the PAYE or IBR plan. After 20 years of payments, they would have $103,047 forgiven, compared to $140,003 for the IBR or PAYE plans.
How much you save under REPAYE depends on your marital status, how much your spouse earns, your income and how much you owe. Use the Department of Education’s repayment estimator to figure out the best option.
You can also contact an accountant or CPA to ask them what your tax liability might be if you choose REPAYE and have your loans forgiven. The cost might seem a bit prohibitive if you’re a new resident, but the expense of hiring a professional to guide you down the right path will end up paying for itself.
A qualified fee-only financial planner can also help decide if REPAYE is the best option for you and your personal situation or if another repayment plan will suit your needs better. They can also show you how to lower your AGI and get a smaller monthly payment if you’re pursuing PSLF with REPAYE.
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